Tax Problems with Whole Life Insurance

Recently you hear in the news about Tax Court making negative decisions regarding whole life insurance. Usually case involves a policyholder challenging insurance company and or IRS regarding a 1099 reporting and the result usually means the policyholder looses. So most policyholders are really upset. Why?

In most cases this results from a mishandled tax deferred account or a cash value life insurance. Probably the insurance agent might have not been forthcoming nor the policy holder aware that the type of account they opened has provisions causing this. Most of the time this is caused by misleading sales presentation whether through a person or marketing messaging in brochures which might not be exactly accurate specially through employee presentations. But also employees and policyholders do not take the responsibility to really take care of their benefits and the details. People sign up for benefits and never follow up. Automatic deductions are taken unless a life event happens not many people revisit these benefits. This is typical usually in the case of younger generation, also this provides with more opportunities for insurance salespeople.

Buying permanent life insurance is not that challenging but it is not easy either. You have to pay attention to details and tailor it around the cash value and personalize it for the policy holder. You need to spend personal time with the sales person before and after the policy. Also like other major financial decisions it usually helps to get advice from professionals and people you trust or even reviewing material and documents by a third person who is proficient with the rules and the subject.

Unlike term life insurance, whole life insurance is an annuity program also like 401k plans and you need to understand and monitor the accumulation and changes in your plan. So it works well as employee benefits but not for hourly wage earners, you need continual education for participants to keep them aware of how they need monitor and grow their investment in the future and to avoid any unnecessary tax consequences.

On the other hand let’s not put all the pressure or blame on the policy holder, the sales person can also do a better job of explaining the product and policy. They should take the time to match the customer to the product they are selling and making sure that they are matched correctly rather than making a sale and commission. They should never over simplify the product, the are really responsible to look out for the policy holder while making a sale. And let’s not forget the employer. The employer has the responsibility to look out for the employees and therefore should investigate thoroughly any benefits before providing them. They should sit with salespeople and thoroughly examine the program, they should also have other professionals review the material for accuracy as well as how relevant they are to the group of employees they will be presented. They should also based on their size have occasional refresher courses and presentations regarding monitoring and any changes or benefits.

So this is not to discourage you from considering whole life insurance as an option but to encourage you to research it better and then keep your eye on it if you choose to proceed with it.